Doug Noland: 'The Situation Is Utterly Hopeless'

One of the notable things about Doug Nolan's weekly PrudentBear Credit
Bubble Bulletin is his measured language. Noland will, like
a lot of commentators these days, say apocalyptic things, but he usually
makes his points with data rather than hyperbole.

But this Friday's Bulletin is more emphatic than usual, which could
be a sign that Noland sees the edge of the cliff approaching. An excerpt follows.
The full article is here.

It's been my long-held view that, in the grand scheme of major Credit busts,
calculations of necessary additions to depleted bank capital basically
become meaningless. The critical issue is not some quantifiable (and "plugable")
hole in banking system capital but, instead, the overall Credit needs of
maladjusted Bubble economic structures and inflated system-wide prices
levels and spending patterns. This is a critical distinction. In the U.S.,
for example, I have argued that a period of prolonged Credit excess created
a financial and economic structure requiring in the neighborhood of $2.0
TN annual net non-financial Credit growth - to keep the economic wheels
rotating and (speculative) asset markets levitating. Post-2008 crisis bailouts
threw hundreds of billions (Trillions?) at the financial sector, although
this changed little with respect to the economy's requirement of massive
Credit creation on an ongoing annual basis. This is an enormous festering
problem that goes unnoticed with attention fixated on European carnage.

From the European experience, we now appreciate that the little, almost
inconsequential Greek economy is quite an impressive financial black hole.
And as things have progressed, critical Credit Bubble Dynamics have been
illuminated for all who want to see. The market has witnessed how the "money" from
Greek Bailout One was soon vaporized. Dexia's 2008 bailout: vaporized.
Greek Bailout II, when it arrives, will be similarly vaporized. European
bank capital: poof. The potential amount of "money" to be vaporized if
Italy succumbs to the highly contagious path of Greece, Portugal and Ireland:
Unfathomable Black Hole. Well, everyone knows this is not an option. So
incredible effort will be exerted to present the European crisis in terms
of some quantifiable, manageable, solvable problem - some quantifiable
cost that might, with the euro at risk, be tolerable to, say, the German
voter.

The markets are somewhat relieved to see policymakers now completely engaged.
Yet I don't foresee an increasingly enlightened marketplace really buying
into any notion that policymakers are getting their arms, minds or pocketbooks
around the problem. Seeming at times in lonely isolation (and I'm not referring
to either their AAA debt rating or manufacturing-based economy), the Germans
appreciate the unfolding "financial black hole" and monetary "slippery
slope" nature of how things are progressing. Meanwhile, on a more daily
and hourly basis, the market focus seems to be whether policy pronouncements
are sufficient to engender another "rip your face off" short squeeze.

Despite stringent austerity measures, Greece will run a deficit this year
of at least 8.5% of GDP. Without a massive and open-ended commitment from
a rapidly depleting European "core," the situation is utterly hopeless.
In a microcosm of the predicament shared by other developed economies,
Greece for too long depended on the creation of new financial claims (Credit)
and consumption at the expense of investment in real wealth creation (is
this type of analysis sounding any less archaic these days?). As much as
policymakers will never admit it, impaired economic structures are at the
heart of an unquantifiable global Credit crisis of confidence. And as de-risking
and de-leveraging empowers contagion effects worldwide, the scope of the
unquantifiable grows only more unfathomable.

And it all seems to boil down to this: Credit cannot be stable within a
backdrop of such extraordinary uncertainty. And, I would argue, no amount
of central bank liquidity ("money") and bank capital is going to engender
sufficient certainty to stabilize global Credit, financial flows and asset
markets. Not with the large number of dangerously maladjusted economies;
not with such well-entrenched global economic and financial imbalances;
and not with today's unbelievable Credit, derivatives, and speculative
leverage overhang. The issue is certainly not a lack of "money" - but rather
a lack of confidence and trust - the bedrock of Credit.

John Rubino is author of Clean Money: Picking Winners
in the Green Tech Boom (Wiley, December 2008), co-author, with GoldMoney's
James Turk, of The Collapse of the Dollar and How to Profit From It (Doubleday,
January 2008), and author of How to Profit from the Coming Real Estate
Bust (Rodale, 2003). After earning a Finance MBA from New York University,
he spent the 1980s on Wall Street, as a currency trader, equity analyst and
junk bond analyst. During the 1990s he was a featured columnist with TheStreet.com and
a frequent contributor to Individual Investor, Online Investor,
and Consumers Digest, among many other publications. He now writes
for CFA Magazine and edits DollarCollapse.com and GreenStockInvesting.com.